Question

Using High-Low to Calculate Fixed Cost, Calculate the Variable Rate, and Construct a Cost Function

Pizza Vesuvio makes specialty pizzas. Data for the past 8 months were collected:

Month   Labor Cost($)   Employee Hours
    January      9,490         380
    February      7,000         440
    March      7,531         460
    April      8,140         350
    May      9,787         410
    June      8,490         320
    July      11,042         520
    August      7,500         290
Pizza Vesuvio's controller wants to calculate the fixed and variable costs associated with the labor used in the restaurant.

In your calculations, round the variable rate per employee hour to the nearest cent. If required, round your final answers to the nearest cent.

Required:

1. Using the high-low method, calculate the fixed cost of labor.
$

2. Using the high-low method, calculate the variable rate.
$ per employee hour

3. Using the high-low method, construct the cost formula for total labor cost.

Total labor cost = $ + ($ × Employee hours)

Answer 1

High Low Labour Cost Employee Hours $ 11,042 5201 $ 7,500 290 Requirement (2) Variable Rate Per Employee Hour : Change In Labour Cost / Change in Labour Hours (11042-7500)/(520-290) $ 15.40 Requirement (1) Total Cost at 520 Employee Hours = 11042 Fixed Cost = 11042 - (520*15.4) $ 3,034 Requirement (3) Total Labour Cost : $3034 + ($15.4*Employee Hours) Note : Do Comment For Any Further Assistance :)